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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-21570

July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL.,
respondents.
Vicente L. San Luis for petitioner.
Office of the Solicitor General A. A. Alafriz,
Assistant Solicitor General F. B. Rosete, Solicitor
A. B. Afurong and Atty. V. G. Saldajeno for
respondents.
REYES, J.B.L., J.:
Appeal interposed by petitioner Limpan Investment
Corporation against a decision of the Court of Tax
Appeals, in its CTA Case No. 699, holding and
ordering it (petitioner) to pay respondent
Commissioner of Internal Revenue the sums of
P7,338.00 and P30,502.50, representing deficiency
income taxes, plus 50% surcharge and 1% monthly
interest from June 30, 1959 to the date of
payment, with cost.
The facts of this case are:
Petitioner, a domestic corporation duly registered
since June 21, 1955, is engaged in the business of
leasing real properties. It commenced actual
business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and
Purificacion Ceiza de Lim, who own and control
ninety-nine per cent (99%) of its total paid-up
capital. Its president and chairman of the board is
the same Isabelo P. Lim.1wph1.t
Its real properties consist of several lots and
buildings, mostly situated in Manila and in Pasay
City, all of which were acquired from said Isabelo
P. Lim and his mother, Vicente Pantangco Vda. de
Lim.
Petitioner corporation duly filed its 1956 and 1957
income tax returns, reporting therein net incomes
of P3,287.81 and P11,098.36, respectively, for
which it paid the corresponding taxes therefor in
the sums of P657.00 and P2,220.00.
Sometime in 1958 and 1959, the examiners of the
Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income
tax returns and, in the course thereof, they
discovered and ascertained that petitioner had
underdeclared its rental incomes by P20,199.00
and P81,690.00 during these taxable years and had

claimed excessive depreciation of its buildings in


the sums of P4,260.00 and P16,336.00 covering the
same period. On the basis of these findings,
respondent Commissioner of Internal Revenue
issued its letter-assessment and demand for
payment of deficiency income tax and surcharge
against petitioner corporation, computed as
follows:
90-AR-C-348-58/56
Net income per audited return
P 3,287.81
Add: Unallowable deductions:
Undeclared
Rental
Receipt
(Sched.
A) . . . . . . . . . . . . . . . . . . . . . . . . . .
.P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 4,260.00
P24,459.00
Net income per investigation
P27,746.00
Tax due thereon
P5,549.00
Less: Amount already assessed
657.00
Balance
P4,892.00
Add: 50% Surcharge
2,446.00
DEFICIENCY TAX DUE
P7,338.00
90-AR-C-1196-58/57
Net income per audited return
P11,098.00
Add: Unallowable deductions:
Undeclared
Rental
Receipt
(Sched.
A) . . . . . . . . . . . . . . . . . . . . . . . . . P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 16,338.00
P98,028.00
Net income per investigation
P109,126.00
Tax due thereon
P22,555.00
Less: Amount already assessed
2,220.00
Balance
20,335.00
Add: 50% Surcharge
10,167.50
DEFICIENCY TAX DUE
P30,502.50
Petitioner corporation requested respondent
Commissioner of Internal Revenue to reconsider
the above assessment but the latter denied said
request and reiterated its original assessment and
demand, plus 5% surcharge and the 1% monthly
interest from June 30, 1959 to the date of
payment; hence, the corporation filed its petition
for review before the Tax Appeals court,
questioning the correctness and validity of the
above assessment of respondent Commissioner of
Internal Revenue. It disclaimed having received or
collected the amount of P20,199.00, as unreported
rental income for 1956, or any part thereof,
reasoning out that 'the previous owners of the
leased building has (have) to collect part of the
total rentals in 1956 to apply to their payment of
rental in the land in the amount of P21,630.00"
(par. 11, petition). It also denied having received
or collected the amount of P81,690.00, as
unreported rental income for 1957, or any part
thereof, explaining that part of said amount
totalling P31,380.00 was not declared as income in
its 1957 tax return because its president, Isabelo P.
Lim, who collected and received P13,500.00 from

certain tenants, did not turn the same over to


petitioner corporation in said year but did so only
in 1959; that a certain tenant (Go Tong) deposited
in court his rentals amounting to P10,800.00, over
which the corporation had no actual or
constructive control; and that a sub-tenant paid
P4,200.00 which ought not be declared as rental
income.
Petitioner likewise alleged in its petition that the
rates of depreciation applied by respondent
Commissioner of its buildings in the above
assessment are unfair and inaccurate.
Sole witness for petitioner corporation in the Tax
Court was its Secretary-Treasurer, Vicente G. Solis,
who admitted that it had omitted to report the
sum of P12,100.00 as rental income in its 1956 tax
return and also the sum of P29,350.00 as rental
income in its 1957 tax return. However, with
respect to the difference between this omitted
income (P12,100.00) and the sum (P20,199.00)
found by respondent Commissioner as undeclared
in 1956, petitioner corporation, through the same
witness (Solis), tried to establish that it did not
collect or receive the same because, in view of the
refusal of some tenants to recognize the new
owner, Isabelo P. Lim and Vicenta Pantangco Vda.
de Lim, the former owners, on one hand, and the
same Isabelo P. Lim, as president of petitioner
corporation, on the other, had verbally agreed in
1956 to turn over to petitioner corporation six per
cent (6%) of the value of all its properties,
computed at P21,630.00, in exchange for whatever
rentals the Lims may collect from the tenants.
And, with respect to the difference between the
admittedly undeclared sum of P29,350.00 and that
found by respondent Commissioner as unreported
rental income, (P81,690.00) in 1957, the same
witness Solis also tried to establish that petitioner
corporation did not receive or collect the same but
that its president, Isabelo P. Lim, collected part
thereof and may have reported the same in his
own personal income tax return; that same Isabelo
P. Lim collected P13,500.00, which he turned over
to petitioner in 1959 only; that a certain tenant
(Go Tong deposited in court his rentals
(P10,800.00), over which the corporation had no
actual or constructive control and which were
withdrawn only in 1958; and that a sub-tenant paid
P4,200.00 which ought not be declared as rental
income in 1957.
With regard to the depreciation which respondent
disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that
some of its buildings are old and out of style;
hence, they are entitled to higher rates of
depreciation than those adopted by respondent in
his assessment.

Isabelo P. Lim was not presented as witness to


corroborate the above testimony of Vicente G.
Solis.
On the other hand, Plaridel M. Mingoa, one of the
BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax
returns of petitioner corporation, testified for the
respondent that he personally interviewed the
tenants of petitioner and found that these tenants
had been regularly paying their rentals to the
collectors of either petitioner or its president,
Isabelo P. Lim, but these payments were not
declared in the corresponding returns; and that in
applying rates of depreciation to petitioner's
buildings, he adopted Bulletin "F" of the U.S.
Federal Internal Revenue Service.
On the basis of the evidence, the Tax Court upheld
respondent Commissioner's assessment and demand
for deficiency income tax which, as above stated
in the beginning of this opinion, petitioner has
appealed to this Court.
Petitioner corporation pursues, the same theory
advocated in the court below and assigns the
following alleged errors of the trial court in its
brief, to wit:
I. The respondent Court erred in holding that the
petitioner had an unreported rental income of
P20,199.00 for the year 1956.
II. The respondent Court erred in holding that the
petitioner had an unreported rental income of
P81,690.00 for the year 1957.
III. The respondent Court erred in holding that the
depreciation in the amount of P20,598.00 claimed
by petitioner for the years 1956 and 1957 was
excessive.
and prays that the appealed decision be reversed.
This appeal is manifestly unmeritorious. Petitioner
having admitted, through its own witness (Vicente
G. Solis), that it had undeclared more than onehalf (1/2) of the amount (P12,100.00 out of
P20,199.00) found by the BIR examiners as
unreported rental income for the year 1956 and
more than one-third (1/3) of the amount
(P29,350.00 out of P81,690.00) ascertained by the
same examiners as unreported rental income for
the year 1957, contrary to its original claim to the
revenue authorities, it was incumbent upon it to
establish the remainder of its pretensions by clear
and convincing evidence, that in the case is
lacking.
With respect to the balance, which petitioner
denied having unreported in the disputed tax
returns, the excuse that Isabelo P. Lim and Vicenta

Pantangco Vda. de Lim retained ownership of the


lands and only later transferred or disposed of the
ownership of the buildings existing thereon to
petitioner corporation, so as to justify the alleged
verbal agreement whereby they would turn over to
petitioner corporation six percent (6%) of the value
of its properties to be applied to the rentals of the
land and in exchange for whatever rentals they
may collect from the tenants who refused to
recognize the new owner or vendee of the
buildings, is not only unusual but uncorroborated
by the alleged transferors, or by any document or
unbiased evidence. Hence, the first assigned error
is without merit.
As to the second assigned error, petitioner's denial
and explanation of the non-receipt of the
remaining unreported income for 1957 is not
substantiated by satisfactory corroboration. As
above noted, Isabelo P. Lim was not presented as
witness to confirm accountant Solis nor was his
1957 personal income tax return submitted in court
to establish that the rental income which he
allegedly collected and received in 1957 were
reported therein.
The withdrawal in 1958 of the deposits in court
pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of
said income in 1957, since the deposit was resorted
to due to the refusal of petitioner to accept the
same, and was not the fault of its tenants; hence,
petitioner is deemed to have constructively
received such rentals in 1957. The payment by the
sub-tenant in 1957 should have been reported as
rental income in said year, since it is income just
the same regardless of its source.
On the third assigned error, suffice it to state that
this Court has already held that "depreciation is a
question of fact and is not measured by theoretical
yardstick, but should be determined by a
consideration of actual facts", and the findings of
the Tax Court in this respect should not be
disturbed when not shown to be arbitrary or in
abuse of discretion (Commissioner of Internal
Revenue vs. Priscila Estate, Inc., et al., L-18282,
May 29, 1964), and petitioner has not shown any
arbitrariness or abuse of discretion in the part of
the Tax Court in finding that petitioner claimed
excessive depreciation in its returns. It appearing
that the Tax Court applied rates of depreciation in
accordance with Bulletin "F" of the U.S. Federal
Internal Revenue Service, which this Court
pronounced as having strong persuasive effect in
this jurisdiction, for having been the result of
scientific studies and observation for a long period
in the United States, after whose Income Tax Law
ours is patterned (M. Zamora vs. Collector of
internal Revenue & Collector of Internal Revenue
vs. M. Zamora; E. Zamora vs. Collector of Internal
Revenue and Collector of Internal Revenue vs. E.

Zamora, Nos. L-15280, L-15290, L-15289 and L15281, May 31, 1963), the foregoing error is devoid
of merit.
Wherefore, the appealed decision should be, as it
is hereby, affirmed. With costs against petitionerappellant, Limpan Investment Corporation.
Concepcion, C.J., Barrera, Dizon, Regala,
Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ., concur.
Income Tax in General
FACTS:
BIR assessed deficiency taxes on Limpan Corp, a
company that leases real property, for underdeclaring its rental income for years 1956-57 by
around P20K and P81K respectively.
Petitioner appeals on the ground that portions
of these underdeclared rents are yet to be
collected by the previous owners and turned over
or received by the corporation.
Petitioner cited that some rents were deposited
with the court, such that the corporation does not
have actual nor constructive control over them.
The sole witness for the petitioner, Solis
(Corporate Secretary- Treasurer) admitted to
some undeclared rents in 1956 and1957, and that
some balances were not collected by the
corporation in 1956 because the lessees refused to
recognize and pay rent to the new owners and
that the corps president Isabelo Lim collected
some rent and reported it in his personal income
statement, but did not turn over the rent to the
corporation.
He also cites lack of actual or constructive
control over rents deposited with the court.
ISSUE: Whether or not the BIR was correct in
assessing deficiency taxes against Limpan Corp.
for undeclared rental income
HELD: Yes. Petitioner admitted that it indeed had
undeclared income (although only a part and not
the full amount assessed by BIR). Thus, it has
become incumbent upon them to prove their
excuses by clear and convincing evidence, which it
has failed to do. When is there constructive
receipt of rent? With regard to 1957 rents
deposited with the court, and withdrawn only in
1958, the court viewed the corporation as having
constructively received said rents. The noncollection was the petitioners fault since it
refused to refused to accept the rent, and not due
to nonpayment of lessees. Hence, although the
corporation did not actually receive the rent, it is
deemed to have constructively received them.
Deductions Depreciation
FACTS: Petitioner is a domestic corporation
engaged in the business of leasing real properties.

It commenced actual business operations on July 1,


1955. Its real properties consist of several lots and
buildings, mostly situated in Manila and in Pasay
City.
Petitioner Corporation duly filed its 1956 and 1957
income tax returns, reporting therein net incomes
of P3,287.81 and P11,098.36, respectively, for
which it paid the corresponding taxes therefor in
the sums of P657.00 and P2,220.00.Sometime in
1958 and 1959, the examiners of the Bureau of
Internal Revenue conducted an investigation of
petitioners 1956 and 1957 income tax returns and,
in the course thereof, they discovered and
ascertained that petitioner had under declared its
rental incomes by P20,199.00 and P81,690.00
during these taxable years and had claimed
excessive depreciation of its buildings in the sums
of P4,260.00 and P16,336.00 covering the same
period. On the basis of these findings, respondent
Commissioner of Internal Revenue issued its letterassessment and demand for payment of deficiency
income tax and surcharge against Petitioner
Corporation. Petitioner corporation requested
respondent Commissioner of Internal Revenue to
reconsider the above assessment but the latter
denied said request and reiterated its original
assessment and demand, plus 5% surcharge and the
1% monthly interest from June 30, 1959 to the date
of payment; hence, the corporation filed its

petition for review before the Tax Appeals court,


questioning the correctness and validity of the
above assessment of respondent Commissioner of
Internal Revenue.
ISSUE: Whether or not the depreciation in the
amount of P20,598.00 claimed by petitioner for
the years 1956 and 1957 was excessive.
HELD: No. Depreciation is a question of fact and is
not measured by theoretical yardstick, but should
be determined by a consideration of actual facts.
The findings of the Tax Court in this respect should
not be disturbed when not shown to be arbitrary or
in abuse of discretion and petitioner has not shown
any arbitrariness or abuse of discretion in the part
of the Tax Court in finding that petitioner claimed
excessive depreciation in its returns. The Tax Court
applied rates of depreciation in accordance with
Bulletin F of the U.S. Federal Internal Revenue
Service, which this Court pronounced as having
strong persuasive effect in this jurisdiction, for
having been the result of scientific studies and
observation for a long period in the United States,
after whose Income Tax Law ours is patterned.
Wherefore, the appealed decision should be, as it
is hereby, affirmed. With costs against petitionerappellant, Limpan Investment Corporation.